Q3 2023 DMC Global Inc Earnings Call
That's it.
Greetings and welcome to the DMC Global third quarter earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being record.
It is now my pleasure to introduce your host Geoff High Vice President of Investor Relations. Thank you, Jeff you May begin Hello, and welcome to Dmc's third quarter conference call presenting today are <unk>, Chief Executive Officer, Mike Cuda, and Chief Financial Officer, Eric Walter I'd.
I'd like to remind everyone that matters discussed during this call may include forward looking statements that are based on our estimates projections and assumptions as of todays date and are subject to risks and uncertainties that are disclosed in our filings with the SEC.
Our business is subject to certain risks that could cause actual results to differ materially from those anticipated in our forward looking statements DMC assumes no obligation to update forward looking statements that become untrue because of subsequent events.
Today's earnings release and related presentation on our third quarter performance are available on the Investor page of our website located at D. M C Global Dot com.
A webcast replay of today's presentation will be available at our website. Shortly after the conclusion of this call.
With that I'll now turn the call over to Michael Cuda, Mike.
Good afternoon, everyone DNC third quarter was marked by both strategic accomplishments and operational challenges.
We reported consolidated sales of $172 million flat versus last year's third quarter and below our prior forecast.
Sales at Arcadia, our building products business were $72 million down 11% year over year steady.
Steady customer activity at Arcadia as primary regional service centers as well as healthy sales that its ultra high end residential business were offset by pricing pressure associated with lower raw material costs.
Soft demand for commercial interior products in a brief operational slowdown related to the transition to a new ERP system.
Dine energetics, our energy products business reported sales of $73 million up 4% year over year, but down 14% sequentially.
U S drilling and completion industry idled additional rigs and frac crews during the quarter and the energy information administration reported a 10% sequential decline in U S well completions.
Diana's U S. Sales also were impacted by customer project delays late in the quarter.
Soft sales in the U S were partially offset by continued strong demand of Diana's International business would you expect to deliver record full year sales in 2023.
And know about flatter composite metals business improved 18% to $28 million versus last year's third quarter.
No about class results reflect outstanding execution on a demanding petrochemical project as well as continued strong demand for pressure vessel place and specialized transition joints.
Nobel quite ended the third quarter with an order backlog of $61 million versus $64 million at the end of the second quarter.
Rolling 12 month bookings were $111 million up sequentially from $108 million and the book to Bill ratio was 1.1.
Our consolidated third quarter adjusted EBITDA attributable the DNC was $25 million or 14, 3% of sales and was within our forecasted range. Despite the lower than expected sales.
D. M sees long term focus is to position each of its businesses deliver adjusted EBITDA margins of 20% or greater our businesses are structuring their operations and making the necessary investments to achieve these objectives on a consistent basis.
At Arcadia additional paint capacity in new ERP system, and a series of operational enhancements and growth initiatives are expected to drive long term improvements in sales and profitability.
In the North American oil and gas market, where diner generates approximately 85% of its sales. We expect continued consolidation by leading operators will sharpen the completion industry's focus on safety technology and efficiency.
China, which had a challenging third quarter has taken a number of steps to streamline its cost structure and will incur roughly a million dollars and associated one time expenses during the fourth quarter.
These cost reductions are expected to result in approximately $3 million in annualized savings.
Dino also is implementing a series of operational excellence initiatives designed to enhance the safety quality and reliability of its perforating systems. These initiatives include greater use of automation throughout Dinas manufacturing and assembly facilities.
Nobel quite as focused on expanding the market for its data pipe and cylinder product lines.
Pursuing emerging opportunities in lithium and hydrogen production.
We expect 'twenty 'twenty four will be another strong year at Nobel Quad.
As Eric will discuss in a moment much improved free cash flow led to further improvements in our financial position during the third quarter.
I remain encouraged by the strength of our differentiated manufacturing businesses and our prospects for profitable long term growth.
Nancy's achievements would not be possible without the efforts of our talented workforce and wanted to acknowledge all of our employees for their hard work and dedication I also want to thank our customers for their loyalty.
With that I'll turn the call over to Eric for a closer look at our third quarter financial results and our guidance for the fourth quarter Eric.
Thanks, Mike.
As previously mentioned, our consolidated third quarter sales were $172 million down 1% from the third quarter last year consolidated.
Gross margin was 36% up 110 basis points from our 2022 third quarter due to a more favorable project mix at <unk> combined with margin recovery at Arcadia.
Our third quarter SG&A expense of $29 million was 16, 7% of sales.
From 17, 5% in the third quarter of last year, driven mostly by lower litigation expense of Diana <unk>.
Third quarter, adjusted EBITDA EBITDA attributable to DMC increased by 13% year over year to $25 million. The improvement was primarily driven by higher sales and gross margin at noble clad Inc.
Inclusive of the Arcadia Noncontrolling interest consolidated adjusted EBITDA was $30 million or 17, 4% of sales.
220 basis points versus the prior year quarter.
At the business level, Arcadia reported third quarter, adjusted EBITDA of $13 million of which $8 million or 60% was attributable to D. M C.
Paired with the prior year, our Katy is adjusted EBITDA rose, 11% and expanded 390 basis points as a percentage of sales.
While our Katy as pricing has moderated this year aluminum costs have declined at a faster pace and contributed to the recovery in EBITDA margin.
[laughter] diner reported third quarter, adjusted EBITDA of $13 million or 17, 2% of sales.
Lower absorption of manufacturing overhead costs, and a less favorable customer mix led to a sequential and year over year margin contraction.
<unk> reported adjusted EBITDA of $6 million, which was 23, 1% of sales and up 850 basis points compared to the third quarter of 2022 EBITDA.
EBITDA margin improved due to a more favorable project mix better absorption of fixed manufacturing overhead costs and lower SG&A.
Adjusted net income attributable to D. M C was $10 million during the third quarter of 2023 adjusts.
Adjusted EPS attributable to D&C was 50 cents.
Over 40% compared to last year's third quarter.
Underlying improvements in gross margin and SG&A more than offset relatively flat sales performance year over year.
During the quarter DMC generated free cash flow of $22 million, which was the highest quarterly level since 2019.
Was up from $17 million in last year's third quarter.
We use this year's third quarter free cash flow, primarily for principal payments on our long term debt distributions to our Acadia joint venture partner and an investment in marketable securities, which will be used as part of our deleveraging efforts.
In terms of liquidity, we ended the third quarter with cash and marketable securities of $36 million and had no amounts outstanding under our $50 million revolver.
Our debt to adjusted EBITDA leverage ratio was 1.26 at the end of the third quarter, which was well below our covenant threshold of 3.0 and represents the seventh consecutive quarter of deleveraging the balance sheet.
On a pro forma net debt basis, after subtracting cash and marketable securities our leverage ratio was 0.89 at the end of the third quarter.
Now turning to fourth quarter guidance consolidated sales are expected in a range of $170 million to $180 million versus the $172 million reported last quarter we.
We anticipate Arcadia as fourth quarter sales volume to be relatively flat sequentially.
<unk> expects to maintain its share in its core North American markets.
Does anticipate overall activity levels will remain soft due in part to year end seasonality.
<unk> sales are expected to accelerate sequentially as the business benefits from delivery of key projects already in backlog.
Consolidated gross margin is expected in a range of 28% to 30% compared with the 36% in the third quarter.
Gross margin at Arcadia, and Diana is expected to be relatively flat quarter over quarter, well know more clouds gross margin will moderate based on project mix.
Consolidated fourth quarter SG&A expense is expected to range from $28 million to $29 million versus the $29 million reported in the third quarter.
Fourth quarter adjusted EBITDA attributable to DMC is expected to be in a range of $20 million to $24 million versus $25 million in the third quarter.
Finally, we expect fourth quarter capital expenditures will be in a range of $8 million to $10 million.
With that we're ready to take any questions operator.
Yeah.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue you.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you. Our first question is from Gerry Sweeney with Roth Capital Partners. Please proceed with your question.
Good afternoon, Mike, Eric and Jeff Thanks for taking my call.
Hi, Jerry Hey, Gerry.
Can we start with <unk>.
Sure.
Take out.
Yeah.
You have the service center work, which I think for lack of better term that sticks that go into a lot of sort of storefronts difference.
Pedestal type operations.
Operations are buildings Ultra high end and then the interior or commercial interiors.
It sounded like the commercial interior business was slow, but I wanted to see how that compared with the other two businesses what are the other two businesses in line with.
Is it entirely commercially insurers just wanted to dig in a little deeper on that front.
Yeah. Thanks, Jerry.
So the commercial interiors, which is our smallest business, we see that in our within Arcadia.
You know like that's in a valley right now at least the work that we're seeing.
With commercial interior build out.
The commercial exteriors business has been.
A relatively I'd call it flat resilience seeing a little bit of softening.
And some of the longer cycle projects, but the short cycle projects, which.
You know theres a lot of diversification in our <unk>.
End markets. There are you know is holding up.
Pretty pretty well.
Got it.
And.
I wanted to talk about.
You've been at capacity in that business and you also have.
You've added areas like Houston, and Dallas and.
Did you hear my worst Huggers, maybe underserved because of capacity issues, you're adding pain.
Our capacity to sort of expand that.
How do we look at you know.
Some of the maybe a little softness on the fog of projects versus short cycle versus adding capacity and sort of maybe investing in new locations.
Does that all come together in terms of growth and opportunities.
Yeah.
Yes on the West Coast, we're definitely in a bit of a softer market you look at the a b I readings.
<unk>.
45.
But theres still a lot of opportunity.
And a lot of our markets, where we're still seeing some some strength. So we're moving around some of the some of the project business.
Into.
Some of our service centers.
That might be seeing a little less activity in pushing on the gas pedal on.
Areas, where.
Activity remains strong so.
Think that.
If we go into a soft or softer market.
There's going to be an opportunity to drive that drive the top line at a still Fei.
Favorable margin. So sorry, this paint capacity that we're putting in place we've done some industrial engineering there we've got more of the paying capacity we can put in.
By mid next year, I think we're going to we're going to be able to sell through sell it through.
Got it.
And then just last question on occasion.
How much was sort of the E. R. P M.
How much did the ERP implementation implementation impact the quarter.
Yes, Jerry So we probably lost two to three days with our service center or a short cycle business and that unfortunately were canceled orders so they're not going to come into Q4. So.
When you think about the impact to our Q3 revenues.
That was as meaningful of an impact as the other two drivers that we talked about.
Got it to.
Got it.
One question on China, and I don't want to monopolize this but.
I think you said completions IEA or EIA were down 10% I think you were down 14%.
In this park, obviously things are slow down everybody is looking at 2024 expectations completions were up or are we sort of in this market were similar market for the third quarter, maybe even the fourth quarter that was similar to a couple of years ago, where everybody knows the benefits of diner, it's a premium products, but they've got crews in there sort of.
Idling them, a little bit there's no sense in paying up for the benefit.
Donna brings when there was a little bit of softness and they have capacity is that what we're potentially seeing.
Yes, I think Jerry what we're seeing is a we have.
We just finished up pretty strong.
Tober.
And I think we will see some seasonality at the end of the year. So I think Dana is going to look in the in the in the fourth quarter or maybe similar to the third quarter. That's in our guidance, Eric you can speak to that but.
But I think some of the initiatives, we're taking and dine energetics are really going to.
Drive results also as we go into 'twenty, four and I think we'll see a bit better of a market as well.
Got it and I think just to augment what Mike said, so some of the softness in Q3 was due to some projects that were pushed out.
We believe that those projects are going to materialize in Q4, so while the top line may be relatively flat, we haven't lost that business. It just skipped out one quarter.
Got it that's helpful too Okay I'll jump back in line. Thank you.
Thanks Jerry.
Thank you. Our next question is from Stephen Kingara with Stifel. Please proceed with your question.
Thanks, Good afternoon everybody.
I guess a good afternoon.
A couple on the dining side. The first is just around what you're seeing from a pricing perspective.
Yeah.
Now versus a couple months ago.
Expectations going forward.
Yeah. So we all we cited on sales down absorption.
Customer and pricing mix, so you've seen a little bit more pressure on price with the market down.
10%.
Hopefully you know we're going to see.
Pricing stabilize here and I think going into 'twenty four.
We'll see where things shake out, but I would think that we'd be in a pretty stable pricing environment.
Okay. Thank you.
When we think about what we have.
On the U S land side, particularly.
Has your pump reserve consolidated you got.
For holding a lot of the capacity.
More of them have their own internal wireline capacity.
Is that.
When you think about the integration of wireline and Frac, we didn't want to see.
The impact that has on us.
Is it negative neutral is there any any read throughs from that.
Yeah.
Yes, I think that.
Frac and wireline and Sis are very focused on.
You know the basics right quality on time delivery delivering the best attack in the industry and if we can do that and continue to do that.
I think we're going to be okay. There.
Alright, and then just one one final when we when we.
When we think about the quarter the third quarter results.
And as we as we lead into the next.
This quarter the next year.
How do we think about.
Incremental margins or margin trajectory and Arcadia, and Donna as you get into 'twenty, one we're kind of assuming some level of recovery in fracking completion activity next year.
As you get growth.
And the business is there a way to kind of think about the incremental margin.
Contribution margin trajectory in those two businesses.
Yeah, I'll start and Eric will finish I think with Arcadia has a pretty high variable cost type business. So we're going to you know we're in the right ZIP code now from a margin standpoint, we should.
It'd probably be operating in that.
Area for Q4.
And beyond.
Diane energetics bit more absorption.
Impact there we've got a lot of projects that we're doing to drive margin from.
From an internal standpoint.
We've cited some of them, but lean initiatives automation.
We've done some cost reductions as well so we think we can.
Drive margin continue to drive margin in the.
Into 2024, probably flat Q3 to Q4.
But we got a lot of things that are.
<unk>.
Or in the.
You know kind of in our project plan for 'twenty four.
Continue to drive margins things that are under our control.
Yes, the only thing I would add to what Mike said is that for Diana the focus really is going to be more on their EBITDA margins as opposed to the gross margins gross margins will always be important but.
Some of the initiatives that Mike pointed to around SG&A control, they're really going to manifest themselves in the EBITDA margin line as supposed to gross margin and we continue to believe that this is a 20% plus EBITDA margin business and want to make sure that we put in these initiatives. So that we not only get back to that but we stay there.
Okay. Thanks, I'll get back in line here. Thank you.
Thank you. Our next question is from Katie <unk> with Keybanc capital markets. Please proceed with your question.
Hi, good afternoon, I am on for Ken Newman today.
Women Hi.
I wanted to talk a little bit about your capital allocation.
So free cash flow pretty strong in the quarter.
Can you just talk about expectations for free cash flow generation going forward and then what some of your capital allocation priorities would be.
Yeah. Thanks for the question so.
Four.
For Q4, and what I would say going into 2024, we're really trying to drive the businesses to have a higher free cash flow conversion. So if you did the math for Q3 would be up around 70% I'm not sure that we can do that every quarter, but typically in the second half of the year because of seasonality we tend to be around that.
Range. So in Q4, we would be looking to be up in that ballpark.
As well and then going forward into next year, a lot of the things that Mike was talking about earlier when he answered the question about initiatives. They have a P&L impact, but they also have a cash flow impact as well whether it's.
Reducing SG&A are driving higher inventory turns so we would look to try to build on that momentum and make sure that we can keep the conversion at a higher rate and then in terms of how we allocate the capital.
We are looking to continue to delever the balance sheet. So that's going to be one area, but we're also putting capex back into the business. So for Arcadia, Mike mentioned, the paint line, where we're going to be looking to do some industrial engineering, we're also going to be looking at making some.
<unk> and <unk>.
The <unk> area, as well, which will help broaden margins for their Canadian business.
And for diner, it's going to be mainly focused on a lot of the internal initiatives around automation and trying to make sure that we can produce our products as efficiently as possible, which should also have an impact on sustainable quality levels. So I think in terms of where we were.
One would be from a cash flow standpoint, we had a good Q3, we want to make sure that that's not just a one time.
For performance, but we can continue that going forward and then in terms of the allocation, we're going to be looking to continue to delever, but also reinvesting back in the business and some of these important initiatives.
Okay, Great that's helpful.
And then on the well completions do you guys have any sort of.
Difficult in this type of environment, but any sort of your view in terms of where those are headed as you kind of close out the year and go into 2024.
Yeah, I think what youre going to see is a pretty steady steady through the end of the year probably hit some seasonality at the end of the year with budget exhaustion and I think then youre going to see a pickup in 'twenty four.
Okay.
And then just one last one switching to Arcadia here can you give a little bit more detail about.
The ERP system.
Much capacity that can add maybe any impacts on costs or margins that would be helpful.
Yeah.
Yes.
ERP system.
Probably wouldn't add any capacity, but what it's going to allow us to do is to have better controls and better visibility into data.
So the first one is probably pretty.
Self explanatory, but the second one what we mean by that is that we think that.
It's going to provide or prevent any type of margin margin leakage between changes in aluminum costs and our ability to pass that through to customers.
Another benefit that we're really excited about is it should also allow us to be more efficient from an inventory turn standpoint.
So if you think about our business model, we've got a hub and satellite type of structure with this new ERP system, we're going to have a better indicate better understanding of where that inventory is how it's turning at the different satellites and how we can transfer it from maybe one satellite where it's moving slower into another one where its moving.
Faster. So we're excited about that and we're just in the early days of going through the implementation, but it is going to pay dividends long term.
Okay. Thanks for the details.
Thanks, Katie Good reminder.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question is from Sean Mitchell with Daniel Energy Partners. Please proceed with your question.
Hi, guys. Thanks for taking the question.
This obviously, but we're always around Dino but.
You mentioned earlier in the call that the larger I think M&A will sharpen the focus of some of these companies on safety and then you also talked about for the quarter, just having a less favorable customer mix can you is there any way you can kind of help us understand just the customer mix today.
And obviously I think where it's going is probably favorable.
With these kind of larger companies doing bigger deals and I tend to agree with you they will focus more on safety.
But where are you today and kind of.
Is it heavier on the private side today and Thats why we saw a little bit more kind of downward pressure in the quarter or is it.
Give us give us a little color around the customer mix today, and maybe where you think it's kelvin.
Yes, I mean, if we rewind.
You know.
Year, two years ago, it was probably a heavier mix on the.
Private side, it's shifted more towards the public side when youre talking about the.
The e&ps.
Our end users.
From a from a customer standpoint, we feel.
Aligned with.
The best in terms of end users as well as.
Service companies.
And so I think that this is something that's going to.
Can play to our favor, especially we deliver on the and I say safety I say quality delivery field service.
And technology, particularly.
As the market moves more.
More towards oriented systems. So I think that's all going to work well for us.
Got it thank you.
Okay.
Thank you Sean.
Okay.
Thank you. Our next question is from Stephen <unk> with Stifel. Please proceed with your question.
Just one quick one do you have any.
Preliminary notes early and preliminary thoughts on 'twenty four capex.
I think.
Right now Steve.
Steven for modeling purposes, I would assume something thats pretty close to the guidance that we've given for 2023, there may be a little bit of an increase for some of the discrete projects that we talked about earlier.
For Anna.
<unk> et cetera.
The run rate that we have this year is probably going to be very similar to that run rate next year.
Okay, Great that was all for me. Thank you.
Okay.
Okay.
Thank you there are no further questions at this time.
I would like to hand, the floor back over to Michael <unk> for closing comments.
Thank you again for joining us today, we remain highly focused on driving performance at Dnc's businesses.
Our objective is to strengthen our profitability and cash flow and drive improved value for our shareholders. We appreciate your continued interest in D&C and look forward to speaking with you after the fourth quarter take care.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.